What is Cumulative Voting?
Shareholders have the opportunity to vote on many different matters of importance to the company they own, including on who should make up the corporate board. In a typical corporate structure, each holder of company stock is entitled to cast one vote for each share of stock the shareholder owns at the time when a matter is brought up for a vote. Whether there are two shareholders, 200 shareholders, or two million shareholders, a share of stock is equal to a single vote.
When this standard voting method is used, minority shareholders have limited say in the makeup of the corporate board. The majority shareholders hold more stock, get more votes, and their opinions are going to take precedence. When it comes to electing the board of directors, this system can be a problem. It is a problem that cumulative voting could solve.
A Southern California business law attorney can provide more information on cumulative voting and on whether it is the right choice in your company to help prevent shareholder disputes. Brown & Charbonneau, LLP has extensive experience helping companies to avoid and resolve shareholder problems and we can provide you with the legal assistance you need to establish the right voting structure for elections of board members.
Understanding Cumulative Voting
Directors run for individual positions on the board, so minority shareholders can only give one vote per share to any single nominee. If a minority shareholders owns 200 shares, for example, those 200 shares can be given only to a single nominee, even if there is an election to appoint four directors to the board. A majority shareholder would have many more shares, many more votes, and could split those votes among different candidates he prefers. Minority shareholders end up with very little say in the makeup of the board, and board members may not be elected that protect their interests.
To give more power to minority shareholders, there is an alternative process that can be used when a board of directors is elected: it is called cumulative voting. Cumulative voting changes the standard one-share/one-vote rule in elections for the board of directors. Cumulative voting gives shareholders the opportunity to cast one vote for each share for each of the different openings on the board of directors at the time when the vote is cast.
For example, while standard voting would give the owner of 200 shares a total of 200 votes no matter how many board positions are being filled, cumulative voting allows shareholders to have 200 votes for each of the openings. When four directors are being chosen, this would mean that a shareholder gets 200 x 4 votes, or 800 votes total. The 800 votes could be given to a single candidate, or could be split any way that is desired.
When you are deciding on how to structure your organization’s shareholder rights, cumulative voting may be the answer if you want to ensure the board is representative of the interests of more than just the majority owners. Call Brown & Charbonneau, LLP today to learn more about whether cumulative voting is right for you. 714-505-3000